Supply and demand – how they control the market

A free market economy is in­flu­enced by supply and demand more than virtually any other factor. If supply exceeds demand, prices fall. In the worst case, companies then find it difficult to sell their goods and services prof­it­ably. Con­versely, if supply is too low, prices rise and consumers can no longer afford the products they want. In both cases, the market normally regulates itself. The exact re­la­tion­ship can be clearly seen by con­struct­ing a supply and demand graph.

“Supply” is the economic term for all goods and services available on the free market, which trading partners can acquire in exchange for money, physical goods or other services. We often think first of consumer goods (such as those typically found displayed in stores), but the term is used in a much broader sense and also covers labor, trans­port­a­tion of goods, cur­ren­cies, raw materials, etc.

“Demand” is the com­ple­ment­ary concept to supply. If refers to the actual re­quire­ment for par­tic­u­lar goods or services among potential trading partners such as companies and house­holds.

Before starting to develop a product, you should identify the basic re­quire­ment for it, as this ul­ti­mately de­term­ines the demand. The idea that a re­quire­ment can be ar­ti­fi­cially created by marketing is a fallacy. If there is no re­quire­ment, your supply will not earn you any profit. If is important to dif­fer­en­ti­ate between a basic re­quire­ment for something and a pref­er­ence for a specific product.

There is a direct re­la­tion­ship between supply and demand, as supply usually rises when demand is high. Initially there is what is known as excess demand when the currently available supply is unable to fully meet re­quire­ments. This leads to a rise in the market price, which in turn causes more companies to offer the relevant good because they can earn a lot of money by doing so (at least at that point in time).

As a con­sequence of this, the effect is fre­quently reversed, as the more expensive a product or service is, the less demand there is for it, as potential buyers look around for cheaper al­tern­at­ives. This results in excess supply. The market price falls until the relevant good is suf­fi­ciently af­ford­able that buyers’ interest – and thus demand – rises again.

At the point where the supply curve and the demand curve intersect, the re­la­tion­ship between supply and demand is perfectly balanced. Exactly as much is produced as is required, and both the market price and pro­duc­tion quantity remain stable. This is known as market equi­lib­ri­um, although it is merely a the­or­et­ic­al figure. In reality, there is always al­tern­at­ing excess demand and supply. This phe­nomen­on is often described with the phrase “the market regulates itself.”

Supply and demand are hugely important to companies’ future planning. Re­gard­less of whether they want to offer new products or services, or whether they are putting together the business plan for a new company – the current needs of the market (demand) and the actual situation (supply) determine their success or failure.

There are various methods of analysing the two variables for a par­tic­u­lar product. Market research studies, customer surveys and economic analysis of price trends and pro­duc­tion figures have all proven effective.

The MVP has proven to be par­tic­u­larly effective for start-ups and tech­no­logy companies who prefer to work with their potential customers rather than con­duct­ing laborious analyses. The MVP is a product that is developed just enough to function properly (so it should satisfy the an­ti­cip­ated re­quire­ments, but not yet be designed to exceed ex­pect­a­tions). Once it is available on the market, it becomes clear whether it has been accepted by the target group. Customers can then review it and provide sug­ges­tions for im­prove­ments and other pref­er­ences, which can be used to perfect the product and tailor it to the demand as much as possible.

Please note the legal dis­claim­er relating to this article.